The Looming War for Blockchain Patents

There’’s a patent land grab developing in the blockchain space that could potentially make doing business more challenging for those who want to build upon the open-source technology in the future.

“Everyone is trying to stake their claim and plot out their business strategy,” said Ted Mlynar, a partner in the intellectual property practice at Hogan Lovells in New York.

According to Mlynar and his colleague, Ira Schaefer, there are a lot of patents pending related to bitcoin, cryptocurrency, blockchain and distributed ledgers.

Publicly available records show the strong interest in filing patents related to the technology. A search for “blockchain” on the US Patent and Trademark Office website brings up 60 hits, whereas looking up “bitcoin” highlights more than 500 pending patents.

“But it remains to be seen whose claim will be allowed or issued,” Mlynar said.

One problem with the claims the two Hogan Lovells partners have seen is that the applications themselves are considerably broad. The Alice Corp Pty Ltd vs CLS Bank Int’l court decision – which singled out financial business methods as abstract concepts that are not likely patentable – means that patent examiners will be taking a stern look at the claims.

Plus, any patent filed after the Leahy-Smith America Invents Act (AIA), which was signed into law in 2011, will be answerable to a post grant review. This allows anyone to oppose the validity of the claim within the first nine months of its issuing, which the two Hogan Lovells partners think will make keeping a blockchain patent difficult.

“All of these are new tools in any kind of patent litigation war, for those who have patents or those who are fighting for patents,” said Schaefer.

And this process of narrowing down the scope of blockchain patents and the impending patent war will likely take several years, according to Mlynar.

But Geoff Cohen, PhD, vice president of digital forensics at Stroz Friedberg in Boston, isn’t so sure.

“The only reason we haven’t seen it yet for all the talk and hype … is that [blockchain] hasn’t turned into huge profits for anybody yet,” Cohen said. “On an industrial economic scale you don’t have standing companies making huge steady profits over the course of multiple years.”

Eve of war

That state of affairs might be right around the corner, however. Several startups and large financial institutions have stoked excitement about the prospect of a commercial launch of their respective blockchain products late this year or early next.

As companies both big and small gear up to launch profit-making products, they’re also gearing up to go to patent war.

Patent litigation, at its simplest, generally goes one of two ways, said Cohen. In once instance, a patent-holding small startup might go after a large corporation knowing it’ll get a sizeable payout from the corporation.

Under the other scenario, a large incumbent player might launch a lawsuit against smaller companies in an effort to effectively tax the competition by way of court expenses. Sometimes, these efforts even put those on the receiving end of a patent lawsuit out of business entirely.

“It’s an investment decision for the startups,” Cohen said. “For large corporates, sometimes they sue for strategic reasons.”

There’s already been a hint of the latter in the blockchain space already, although via trademark infringement. Eris Exchange, an over-the-counter futures market is trying to stop Eris Industries, a well-known blockchain software startup, from using the name.

What’s particularly interesting about the case, according to a report by American Banker, is that Eris Exchange’s founder and board member, Don Wilson, is also the co-founder and a board member of Digital Asset Holdings, the competing blockchain startup led by Blythe Masters, a former JPMorgan Chase executive. However, it’s unclear whether there is a direct connection.

Another soon-to-be plaintiff could be Dell Products LP. The company published an application for computing device configuration and management using a secure decentralized transaction ledger. The patent is a continuation of one the company applied for in March 2015. If that patent is issued, the incumbent company could go after smaller startups using the same process.

But bitcoin and blockchain startups are also securing their stake. For example, Coinbase has about 10 patent applications waiting in the wings.

Defensive offense

Cohen has some first-hand experience with these issues. His background lies in computer science, but he spent the past 10 years consulting on high-stake, high-tech litigation for Stroz Friedberg. Specifically, he and his team worked through many smartphone patent cases between 2010 and 2013.

One threat Cohen has seen and is worried might affect the blockchain industry is that large companies, which perceive that they have monopoly of sorts being undermined by small startups trying to offer the same kind of service, will move to stifle any possible competition. In many instances, the larger company will dredge up past patents, sometimes for products that never went to market, in order to wage war against another firm.

“Big companies tend to have big portfolios of thousands of patents that they can generally find something that relates,” Cohen said.

But Schafer and Mlynar aren’t so sure. They haven’t seen any large institutions getting issued handfuls of blockchain-related patents. Although, they agree many companies get patents for defensive measures.

“There are a lot of strategies for patent enforcement, mainly someone has economic interests that they are trying to advance, a business that you are trying to protect, so you can use patents to clear out competition,” Mlynar said. “But the blockchain needs multiple participants so … you risk public censure.”

Plus, patents are typically issued on 20-year timelines and can be used to sue for infringement and damages going back six years with injunction against further or future use.

“That’s why patents are so valuable,” said Schaefer.

Blockchain patent push

Of course, you can’t explore the idea of blockchain patents without touching on Satoshi Nakamoto, the pseudonymous creator of bitcoin. History suggests that Nakamoto must be more aligned with the open-source community than patent-hungry corporations, since he/she/they did not apply for a bitcoin patent in 2009.

And, since the invention itself has been used in the public for more than a year, any creator would be barred from patenting it at this point.

“Once something has become public information there’s not a whole lot you can do to reverse that; that’s not fair to the general commonwealth,” Cohen said. “There’s public interest in saying if you’ve let it out in the public for a year, you’ve missed your window.”

It’s because of this that the industry is unlikely to see any foundational patents actually being issued.

While patent issuance can sometimes take several years, it’s not likely that someone has a foundational patent on bitcoin that hasn’t been realized – one in which anyone that’s operating in bitcoin might then have to pay a tax to the patent holder.

The more plausible scenario, according to Cohen, is that people will obtain patents for specific applications or uses cases for bitcoin or other blockchains. For example, the US Patent and Trademark Office (USPTO) just issued a patent for a method of analyzing transactions on a distributed ledger.

However, it’s also unclear how narrowly or broadly the scope of those patents will be interpreted.

“There will not likely be a patent for all uses of the blockchain or of distributed ledger. Instead they’ll be very specific,” Cohen said.

Beware of trolls

Even more worrisome than the back-and-forth between incumbents and startups could be the patent trolls, or, as Cohen politely put it, the patent assertion entities (PAEs).

PAEs like Intellectual Ventures or Acacia Research Corporation buy up portfolios of patents and keep them on the sidelines until they see an opportunity to make money on either litigation or a licensing campaign.

“I would be surprised if these companies didn’t have some patents in the bitcoin/blockchain field or the money to buy up a company that does have those patents,” Cohen said. “The better funded these [bitcoin/blockchain startup] companies are and the more profit they’re making, the more the patent world is going to start circling around and looking for a target.”

Plus, abstract patents that are applied to new technology, sometimes called ‘submarine patents’, are going to make these threats hard to see in advance.

Yet for all the gloom and doom, according to Cohen, there are ways to protect the technology. It’s something that will require the community to come together to protect businesses from the threat of licensing fees and patent litigation, he said.

For instance, when a large corporate starts suing smaller companies over patents, those small firms will generally work on their own to fight the lawsuit. However, if all of those businesses came together to hire a law firm to defend them all, they might have a better chance at continuing business and fending off the suit.

“The more coordination and collective action there can be, the more efficient the response is,” Cohen said.

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